Exclusive: Study Stresses Staying Power of Disc

Redbox is still on track to introduce a digital offering this year, but a new study the disc rental giant commissioned shows the staying power of physical media.

Pulling data from DEG: The Digital Entertainment Group, or DEG, the Entertainment Merchants Association, or EMA, and the Consumer Electronics Association, or CEA, the study concludes that physical media will remain the dominant home media format through at least 2015. (See the study here.)

“The advent of new technology and distribution methods, though breakthrough, is not always a metamorphic event,” “The Future of DVD” study concludes. “The pace of adoption is dictated by multiple sources: industry influence, consumer demand and access.

“It is possible that DVD/Blu-ray and digital content will continue to exist in concert as reduced costs, industry evolution and consumer access make way to a gradual transition to digital,” the study states.

Digital distribution will progressively gain market share, but it could take as long as a decade for digital distribution to reach majority market share, the study reports, partially due to the studios’ dependence on profits from physical media sales. DEG data pegged 2010 physical media retail revenue at $16.3 billion.

Rental data obviously is important for Redbox, and the study points to IHS Screen Digest numbers — 2.4 billion American DVD and Blu-ray Disc rentals in 2010 — as a good sign for the lifespan of disc.

“The low price point of rentals, the increased presence of retailers and ownership of DVD and Blu-ray Disc players have made physical media the go-to choice for home entertainment,” the study reads.

“The portability and relatively inexpensive price point of the DVD help expand the lifespan of physical media, highlighted by Redbox’s $1-a-night rentals and Netflix’s unlimited DVD subscription plans that start at $9.99 per month,” the study continues. “Additionally, purchases of Blu-ray Discs and players jumped 86% in 2010, giving further evidence that physical media as the primary home video medium will take substantially longer to fade out than the demise of VHS a decade ago.”

VHS rental revenue declined 43% from $12.3 billion to $6.9 billion from 1999 to 2003, according to DEG data. Meanwhile, four years after DVD’s $20.2 billion peak in 2006, revenue has fallen 19%.

Unlike the transition from VHS to DVD, there is no single digital distribution method of consumption, with DVDs, Blu-rays and digital offerings often playing on the same devices. And with EMA data showing 92 million U.S. households with a DVD player, 14 million with a Blu-ray player and 46 million with gaming consoles that play one or both, “it can be concluded that a large segment of the U.S. has committed to packaged media for their home video use,” the study says.

While HDTV prices are dropping, only 11% of the 90 million HDTVs purchased between 2008 and 2011 are Internet-connected (CEA data), “indicating the continued need for DVDs,” the study found.

“In 2014, nearly 70% of TVs shipped globally will be network-enabled, though not necessarily Web-enabled, In-Stat noted in a separate January 2011 report,” the report reads.

“Adding together the impact of brick-and-mortar stores, kiosks and DVD subscription services, DVD rental demand will be about the same in 2014 as it was in 2008,” the study reads. “Physical rental is also projected to have three times the market share as digital rentals in 2014, indicating that the obsolescence of physical media within the home video market is not a near-term event.

“Even as digital use increases and broadband penetration of U.S. households surpasses the 90% level in the next few years, it may be years before digital accounts for just half of the home video rental market.”

Digital did own 13% of the 2010 home media pie, up 11% year over year, the report noted, but the $2 billion Americans spent on VOD and electronic sellthrough still paled in comparison to the roughly $18 billion they spent on DVD and Blu-ray.

“As Blu-ray high-definition home video becomes the norm, digital could require some consumers to downgrade their viewing experiences or opt out of new features,” the study reads. “For example, 3D content requires about twice the bandwidth as conventional 2D, and few U.S. households in the near future will have access to the bandwidth needed to download high-definition and 3D movies in a timely fashion.”

Russ Crupnick, entertainment industry analyst for The NPD Group, cautioned that the definition of "market" for home entertainment is currently in flux, but agreed with the conclusions in the report.

"You can quibble about the data, and most of all the timing, which we all like to do, but the conclusion is accurate," he said. "Physical is the dominant format in the U.S. from any number of perspectives; share of wallet or the population who use various video options to watch movies. It's not only possible physical and digital will co-exist, it's probable; and for some years to come."

Crupnick went on to point out that studios already have realized the importance of digital, pointing to online endeavors and digital copies in Blu-ray combo packs. And digital can still help drive physical sales, he said.

"So long as consumers own players, eat Big Macs and shop at Walmart, Redbox will have a physical customer base for $1 rentals," Crupnick said. "Consumers still say that for the right movie, at the right price, with the right packaging, they want to own. So a Blu-ray combo pack of Avatar with stunning visuals, bonus features and digital copy will have consumer appeal despite other options for viewing the movie."